Hydropothecary reports fiscal 2018 third quarter results

GATINEAU, Quebec, June 28, 2018 (GLOBE NEWSWIRE) -- The Hydropothecary Corporation (TSX:HEXO) (the "Company") reported its financial results for the three and nine months ended April 30, 2018, the third quarter of the 2018 fiscal year. The management discussion and analysis for the period and the accompanying financial statements and notes are available under the Company's profile on SEDAR at www.sedar.com and on its website at www.HEXO.com. All amounts are expressed in Canadian dollars.

Highlights

Revenue per gram increased to $9.24 per gram equivalent from $8.99 in the prior quarter, and $8.62 in the third quarter of fiscal 2017.

Weighted average cash cost of dried inventory sold per gram of $0.88 has decreased 57% year-over-year compared to the third quarter of fiscal 2017.

Revenue increased 5% to $1,240,172 and the volume of medical cannabis sold increased 2% to 134,253 gram equivalents from the second quarter of fiscal 2018.

Finalization of the commercial supplier agreement with Société québécoise du cannabis (SQDC) to supply approximately 200,000 kg of cannabis over a five-year term.

20,000 kg of cannabis to be supplied to the SQDC in year one of the supplier agreement post legalization.

Cash and short-term investments of $248.9 million as at April 30, 2018, debt-free balance sheet.

Launch of the new recreational adult-use cannabis brand HEXO.

First plants planted in newly licensed zones of the new 250,000 sq. ft facility.

Graduated to the Toronto Stock Exchange (TSX) from the TSX Venture Exchange (TSXV) with the common shares now trading under the symbol HEXO.

Announcement of intention to change the Company name to HEXO Corp. from the Hydropothecary Corporation.

“In the past quarter, we finalized a long-term supply contract as the preferred supplier to the Société québecoise du cannabis (SQDC) for approximately 200,000 kg of cannabis, over a five-year period. This gives us the second highest recreational revenue certainty among licensed producers for the first year of the adult-use market in Canada, with 20 metric tons committed, representing 35% of the Quebec adult recreational market.” said Hydropothecary Chief Executive Officer and co-founder Sebastien St-Louis. “We also launched HEXO, a new brand that will serve the recreational cannabis market and transferred the first plants in to our 250,000 sq. ft. greenhouse expansion a month ahead of schedule. I'm very proud of the team for their planning, and execution."

Third Quarter 2018 Results

Summary of results for the three- and nine-month periods ended April 30, 2018 and April 30, 2017 (In thousands of Canadian dollars, except share and per share amounts, and where otherwise noted)

Income Statement

For the three months ended

For the nine months ended

30-Apr-18

30-Apr-17

30-Apr-18

30-Apr-17

Revenue

$

1,240

$

1,182

$

3,523

$

3,235

Adjusted Gross Margin

$

761

$

441

$

2,130

$

1,883

Gross margin

$

2,666

$

1,377

$

5,881

$

3,386

Operating expenses

$

5,319

$

2,385

$

13,654

$

5,585

Loss from operations

$

(2,653)

$

(1,008)

$

(7,773)

$

(2,199)

Net of other income/(expenses)

$

682

$

(10,800)

$

(5,069)

$

(11,153)

Net income (loss)

$

(1,971)

$

(11,808)

$

(12,841)

$

(13,352)

Weighted average shares outstanding

179,889,233

67,563,381

115,516,079

52,723,599

Net income (loss) per share

$

(0.01)

$

(0.17)

$

(0.11)

$

(0.25)

* As a result of a business combination completed on March 15, 2017, pre-consolidation THCX shares were exchanged at a rate of six to one. Shares after this date have been stated using post-consolidation figures. (See Note 4 to the condensed interim consolidated financial statements for the three and nine months ended April 30, 2018.)

Revenue

For the three months ended

For the nine months ended

30-Apr-18

30-Apr-17

30-Apr-18

30-Apr-17

Revenue

$ 1,240

$ 1,182

$ 3,523

$ 3,235

Total gram equivalents sold

134,253

137,123

386,598

308,423

Sales volume decreased 2% to 134,253 gram equivalents, compared to 137,123 in the same prior year period, reflecting an increase in demand for our value added oil based products. Revenue per gram equivalent increased to $9.24 as compared to $8.62 in the same prior year period, mainly as a result of higher sales of our Elixir product line, which contributes $11.29 per gram equivalent.Revenue for the third quarter ended April 30, 2018 increased 5% to $1,240 compared to $1,182 in the same period in Fiscal 2017. Higher revenue was driven mainly by increased Elixir sales volume, offset partially by lower dried product sales volume as the Company continued to focus significantly on the upcoming adult-use market. Compared to the prior quarter, the sequential revenue increase was 5%, reflecting higher oils sales volume offset partially by lower dried product sales volume and slight decrease in the average dried product selling price.

On a sequential basis, sales volume increased 2% compared to the second quarter of Fiscal 2018, essentially for the same reasons as noted above.

For the nine months ended April 30, 2018, revenue increased 9% to $3,523 compared to $3,235 in the same period in Fiscal 2017. Sales volume increased 25% to 386,598 gram equivalents, compared to 308,423 in the same prior year period.

Cost of Sales

Cost of goods sold includes the direct costs of materials and labour related to inventory sold, and includes harvesting, processing, packaging and shipping costs.

Fair value adjustment on sale of inventory includes the fair value of biological assets included in the value of inventory transferred to cost of sales.

Fair value of biological assets represents the increase or decrease in fair value of plants during the growing process less expected cost to complete and selling costs and includes certain management estimates.

For the three months ended

For the nine months ended

30-Apr-18

30-Apr-17

30-Apr-18

30-Apr-17

Cost of Sales

$

479

$

741

$

1,393

$

1,352

Fair value adjustment on sale of inventory

$

572

$

301

$

2,419

$

499

Fair value adjustment on biological assets

$

(2,477)

$

(1,237)

$

(6,169)

$

(2,001)

Total Fair value adjustment

$

(1,905)

$

(936)

$

(3,750)

$

(1,502)

Cost of sales for the quarter ended April 30, 2018 was $479, compared to $741 for the same quarter ended April 30, 2017. Included in the quarter ended April 30, 2017 cost of sales is the $291 write down of inventories due to the Company’s voluntary recall in May 2017, which when excluded yields a cost of sales of $450. The decrease in cost of sales is the result of a reduction in cash costs as we have gained efficiencies in the production process, which is being reflected in the current product mix sold in the period.

Fair value adjustment on the sale of inventory for the third quarter ended April 30, 2018 was $572 compared to $301 for the same quarter ended April 30, 2017. This is due to the increase in production scale.

Fair value adjustment on biological assets for the third quarter ended April 30, 2018 was ($2,477) compared to ($1,237) for the same quarter ended April 30, 2017. This is due to an increase in the number of plants as we ramp up production for the adult use recreational market.

Non – IFRS Measure

Weighted average cash cost of dried inventory sold per gram

Weighted average cash cost of dried inventory sold per gram includes direct costs associated with the growing, harvesting and processing of inventory sold such as labour, utilities, fertilizer costs, biological control costs, general supplies and materials, curing, milling, quality assurance and testing, of inventory sold in the period.

As there are no standardized methods of calculating this non-IFRS measure, our methods may differ from those used by others, and accordingly, the use of this measure may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

Weighted average cash cost of dried inventory sold is calculated as follows:

Q3’18

Q2’18

Q1’18

Q3’17

Cost of goods sold

$

479

$

451

$

463

$

741

Less

Order fulfillment costs

$

(335)

$

(286)

$

(307)

$

(167)

Cannabis oil conversion costs

$

(43)

$

(41)

$

(32)

-

Recall of inventory write down

-

-

-

$

(291)

$

101

$

124

$

124

$

283

Number of dried gram sold

114,968

127,769

115,768

137,123

Weighted average cash cost of dried inventory sold (g)

$

0.88

$

0.97

$

1.07

$

2.06

Weighted average cash cost of dried inventory sold per gram declined 57% year over year to $0.88 for the third quarter ended April 30, 2018, compared to $2.06 for the same prior year quarter. Cost per gram sold has been trending downward as a result of improvements in cultivation processes and economies of scale resulting from the full utilization of higher production capacity. We expect the scale up of growing and harvesting methodology to drive further improvements in production efficiencies.

During the prior year quarter ended April 30, 2017, the Company recorded a write-down of inventories related to the Company’s voluntary recall.

Operating Expenses

For the three months ended

For the nine months ended

30-Apr-18

30-Apr-17

30-Apr-18

30-Apr-17

General and administration

$

2,028

$

1,161

$

5,074

$

2,403

Marketing and promotion

$

2,102

$

873

$

4,528

$

2,324

Stock-based compensation

$

783

$

184

$

3,064

$

466

Amortization of property, plant and equipment

$

163

$

116

$

475

$

225

Amortization of intangible assets

$

243

$

51

$

513

$

167

Total

$

5,319

$

2,385

$

13,654

$

5,585

Operating expenses include marketing and promotion, general and administrative, research and development, stock-based compensation, and amortization expenses. Marketing and promotion expenses include customer acquisition costs, customer experience costs, salaries for marketing and promotion staff, general corporate communications expenses and research and development costs. General and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including legal, insurance and professional fees.

General and Administrative

General and administrative expenses increased to $2,028 in the third quarter, compared to $1,161 for the same period in Fiscal 2017. This increase reflects the growing scale of our operations, including an increase in general, finance and administrative staffing, consulting and professional fees, as well as increased compliance costs as a listed company.

For the nine months ended April 30, 2018, general and administrative expenses increased to $5,074 compared to $2,403 for the same period in Fiscal 2017.

Marketing and promotion

Marketing and promotion expenses increased to $2,102 in the third quarter, compared to $873 for the same period in Fiscal 2017. This primarily reflects additional marketing and promotional events undertaken in Q3. This is inclusive of higher staff and travel-related expenses, printing and promotional materials as well as advertisement costs. This is consistent with our focus to prepare for the legalization of the adult recreational market.

For the nine months ended April 30, 2018, marketing and promotion expenses increased to $4,528, compared to $2,324 for the same period in Fiscal 2017.

Amortization of intangible assets

Amortization of intangible assets increased to $242 in the third quarter, compared with $51 for the same period in Fiscal 2017, and $188 in the second quarter of Fiscal 2018. The increase is the result of a change in the expected useful life of certain software as we prepared for the implementation of a new ERP system in the fourth quarter of Fiscal 2018, which will replace certain software programs we currently use.

Loss from Operations

Loss from operations for the third quarter was $2,653, compared to $1,008 for the same period in Fiscal 2017. The increased loss from operations is due mainly to higher expenses in line with the expanding scale of operations as we prepare for the legalization of the adult recreational market.

For the nine months ended April 30, 2018, loss from operations was $7,773, compared to $2,199 in the same prior year period for the same reasons as the change for the three month period.

Other Income/Expenses

Other income/expense was $682 and ($5,069) for the three and nine months ended April 30, 2018 (($10,800) and ($11,153) for the three and nine months ended April 30, 2017 respectively). Revaluation of financial instruments of ($305) in the latest quarter reflects the revaluation of an embedded derivative related to $3,275 of USD convertible debentures issued and converted in the prior year. Additionally, we incurred interest income for the three months ended April 30, 2018 and April 30, 2017 of $849 and $31, respectively. Interest expenses of $Nil and $79 were realized for the three months ended April 30, 2018 and April 30, 2017 respectively. This increase reflects the interest generated from the acquired short-term investments during the quarter ended April 30, 2018.

About HEXO HEXO creates and distributes innovative, easy-to-use and easy-to-understand products to serve the Canadian cannabis market. One of the country’s lowest-cost producers, HEXO is rapidly increasing its production capacity in the lead up to the adult-use cannabis market. The Company currently operates with 300,000 sq. ft. of production capacity and has another 1,000,000 sq. ft. expansion set to be complete by year end. HEXO will serve the adult-use market under the HEXO brand, while continuing to serve its medical cannabis clients through the well-known Hydropothecary brand.

Forward-Looking Information

This press release may contain forward-looking information that is based on certain assumptions and involves known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current assumptions and expectations. These statements should not be read as guarantees of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements. A more complete discussion of the risks and uncertainties facing the Company appears in the Company’s Annual Information Form and continuous disclosure filings, which are available on SEDAR’s website at www.sedar.com. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company disclaims any intention or obligation, except to the extent required by law, to update or revise any forward-looking statements as a result of new information or future events, or for any other reason.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

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